INVESTORS’ PROTECTION UNDER CORPORATE GOVERNANCE

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SOUMITRA CHAWATHECompany Secretary, Pune

INTRODUCTION

Investors invest their hard earned money

Assurance about safety

Are investors innocent?

Past events have shook investor confidence

Increased need for corporate governance

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THE NEED FOR INVESTOR PROTECTIONCorporate Scams and Accounting ScandalsInsider TradingNon-disclosure of material factsVanishing Companies – Taking investors’ money and

disappearingTerrorist fundingMoney laundering

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EVOLUTION OF CORPORATE GOVERNANCE

• Corporate Governance principles by sages and hermits in ancient India – Have we forgotten these values?

• Kautilya has elaborated on four fold duties of a king

• Duties- Raksha (protection), Vrudhi (enhancement), Palana (maintenance), Yogakshema (safeguard)

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CORPORATE GOVERNANCE - WHAT DOES IT MEAN

The social, legal & economic process in which Companies function and are accountable

Conducting the affairs of the company in a manner that ensures fairness to the stake holders, i.e.Customers EmployeesInvestorsLenders and institutionsVendorsThe Government, andThe Society as a whole 5

ELEMENTS OF GOOD CORPORATE GOVERNANCE

• Transparency• Disclosures• Accountability• Equity• Compliance• Ethics• Share holder’s value

THE SEVEN COMMANDMENTSTHE SEVEN COMMANDMENTS6

MODERN DAY PRINCIPLES OF CORPORATE GOVERNANCE

Solid Foundations for management and oversight

Structure the Board to add value

Promote ethical and responsible decision making

Safeguard integrity in financial reporting

Timely & Balanced Disclosure

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MODERN DAY PRINCIPLES OF CORPORATE GOVERNANCE

Protection of stakeholders’ rights

Encourage and enhance performance

Recognize and manage risk

Remunerate fairly

Recognize legitimate interests of shareholders

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INVESTOR PROTECTION VIS-À-VIS CORPORATE GOVERNANCE

Investor Protection – Most important, yet neglected

Professional Ethics & Responsibility

Role of Market Regulators

Shareholders Activism – Healthy trend for Corporate Governance

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INVESTOR PROTECTION MEASURES IN INDIA

SEBI ESTABLISHED IN 1992

FUNCTIONS OF SEBI

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MEASURES INITIATED BY SEBIVetting Offer Documents

and Prospectus

Advertising Code for issues

IPO Grading

Improve functioning of Stock Exchanges

Securities Appellate Tribunal

Disclosure of NAV of Mutual Funds daily

Publications / Awareness Programmes

Stringent requisites for an intermediary

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EXPERT COMMITTEE (DR. J.J. IRANI COMMITTEE)

As per the new company law by the Expert Committee training of directors should be aimed at better discharge of fiduciary duties and value enhancing board activities

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KUMAR MANGALAM BIRLA COMMITTEE

Clause 49 was introduced in the Listing Agreement pursuant to the recommendations of the report of Committee

Constituted by SEBI in May 1999

Large number of complaints from the investors prompted the constitution

Recommended appointment of minimum number of independent directors in board

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I. Board of Directors

a) Composition of Board of Directors

b) Non Executive Director’s Compensation & Disclosures

c) Other Provisions as to Board of Directors

d) Code of Conduct

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II. Audit Committee

a) Qualified & Independent Committee

b) Meeting

c) Powers

d) Role

e) Review of information

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III. Subsidiary Companies

a) At least One Independent Director of holding Company on the Board of materially non listed subsidiary company

b) Audit Committee of Listed Company should also review the financial results of Materially non listed subsidiary company

c) Minutes of the non listed subsidiary company be placed and before the board of the listed company

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IV. Disclosures

a) Related Party Transactionsb) Accounting Treatmentc) Board Disclosuresd) Proceeds from public/ right issue/ preferential

allotments etc.e) Remuneration of Directorsf) Managementg) Shareholders

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V. CEO/ CFO Certification

a) Review and Declarations of Financial Results

b) Declaration as to no transactions of fraudulent, illegal or violative of code of conduct, are entered by the Company

c) Responsibility for establishing and maintaining internal controls for financial reporting

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VI. Report On Corporate Governance

a) Separate section in Annual Report of the Company with detailed report on compliance of corporate governance

b) Quarterly Compliance Report to be submitted to the Stock Exchange within 15 days of close of quarter.

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VII. ComplianceCompanies to obtain certificate from Auditors or PCS

regarding compliance of conditions of Corporate Governance as stipulated in this Clause.

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Shareholder Activism – Healthy trend for Corporate Governance

Shareholder Activism means the active involvement of stockholders in their Organization

Involvement can be done in various ways : Establishing dialogue with the management on issues that

concern you.Influencing the corporate culture.Using the corporate democracy provided by law.Increasing general awareness on social and human rights issues

concerning the organization. Internet and mass media are effective tools in building up pressure on the management.

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Shareholder Activism – Healthy trend for Corporate Governance

• Participation in the meetings• Concern over the financial matters• Proxy Battles • Publicity Campaigns• Shareholder Resolution• Litigation and Negotiation with the management

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IMPORTANCE OF CORPORATE GOVERNANCE

• Enhances the ethical value system

• Protects the rights of the shareholders by ensuring equitable treatment.

• Cope with the challenges of liberalization, privatization and globalization.

• Timely and accurate disclosure on all materials matters

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IMPORTANCE OF CORPORATE GOVERNANCE

• Corporate Excellence Through Transparency, Accountability and Responsibility.

• Compliance of All the Relevant Law and Regulations.

• Best Business Ethical Practices and Value Based System.

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ROLE OF COMPANY SECRETARIES• Governance architecture

• Board/Committee meeting

• Compliance officer: Ensure compliance of clause 49 and report to the Stock Exchanges.

• Annual Reports : Compile various reports and make necessary disclosure in Annual reports.

• Proactive initiative in good governance and monitoring governance practices

• Role of a Practicing Company Secretary26

Consequences of Investors Protection Two broad areas in which investor protection has an impact : Financial Markets

The most basic prediction of the legal approach is that investor protection encourages the development of financial markets. When investors are protected from expropriation, they pay more for securities, making it more attractive for entrepreneurs to issue these securities.

 

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Consequences of Investors ProtectionReal Consequences

Through its effect on financial markets, investor protection influences the real economy. Financial development can accelerate economic growth in three ways :

Enhance savings. It can channel these savings into real investment and thereby foster

capital accumulation.To the extent that the financiers exercise some control over the

investment decisions of the entrepreneurs, financial development improves the efficiency of resource allocation, as capital flows toward the more productive uses. All three channels can in principle have large effects on economic growth.

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CONCLUSION

• Corporate governance should not be followed just as set of rules and procedures.

• Can not be the same all the time.

• Well defined and well accepted accounting practices are pre-requisites in corporate governance.

• Corporate Governance is the key to Corporate Excellence

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NEVER MAKE A NEGLIGENCE

IN GOOD CORPORATE GOVERNANCE

IT REALLY MAKES TRUE SENSE

TO ACHIEVE CORPORATE EXCELLENCE

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